Kazakhstan’s Pipeline Dependence: Current State and Future Outlook - Part Two - China

analysis

Kazakhstan’s Pipeline Dependence: Current State and Future Outlook - Part Two - China

By SRI ⋅ September 19, 2007 ⋅

Kazakhstan and China

China has a growing presence in Kazakhstan, even though it is a relative newcomer in the race to develop its hydrocarbon reserves. Initially, China’s main goal in establishing relations with Kazakhstan and other Central Asia states lied in delineating and securing its borders following the fall of the Soviet Union. At that time, the Shanghai Cooperation Organization was established as a forum to bring together China and its neighboring Soviet legacy states and help resolve the decades old border dispute.

Another important aspect of Chinese foreign policy towards the newly established Central Asian states was the containment of its Uighur minority. The Western Chinese province of Xinjiang has a large population of Muslim Uighurs, Turkic people and historically and ethnically part of Central Asia. While China has kept any separatist tendencies in Xinjiang under a tight lid, the fall of the Soviet Union and sudden independence of other Central Asia states could not come as a welcome development for the Chinese. Therefore, China has spent a greater part of its diplomatic efforts towards the new Central Asian countries making sure that there would not be any official and unofficial sanctioning of the Uighur separatist movement.

These two security concerns dominated China’s policies towards Central Asia in the 1990’s. China’s approach started changing slowly only in the later part of the decade when China awakened to its needs for both energy and export markets. Trade between China and Kazakhstan commenced almost immediately after the fall of the Soviet Union, mainly driven by the so-called shuttle traders. However, it really took off after 1998 when Kazakhstan and China resolved their dispute over the 1700-kilometer common border. In 2006, the China-Kazakhstan trade volume reached $8.36 billion, and in the half of 2007, it reached $5.97 billion.

Chinese Energy Policy in Kazakhstan

China’s first significant step in its Kazakhstan energy policy occurred in September 1997 when both countries signed a $9.5 billion agreement. The contract confirmed the award to the China National Petroleum Corporation (CNPC) of two projects. The first project involved the development of two new oil fields, Zhanazhol and Kensayak, in the Aktyubinsk region, and the rehabilitation and exploration of the Uzen oil field. The second project was the construction of a 3,000-kilometer pipeline connecting these oil regions to Chinese Xinjiang province.

This agreement was at that time the largest oil deal between a foreign investor and a former Soviet country but the subsequent Asian financial crisis and depression of oil prices delayed both the construction of the pipeline and the rehabilitation of the Uzen field, as well as a more significant Chinese entry into Kazakhstan’s hydrocarbon markets.

The second push to become a significant player in Kazakhstan has been more successful. While CNOC’s bid in 2003 to buy into the consortium developing the Kashagan field did not succeed, in 2004 it was able to take control of the Canadian oil company PetroKazakhstan for $4.0 billion. Overall, while China has not yet achieved a position in one of Kazakhstan’s blue-chip fields like Tengiz or Kashagan, it has amassed, mainly through acquisitions, a significant portfolio of oil assets in Kazakhstan.

In 2004, CNOC began construction of the pipeline to connect its new acquired fields to the Xinjiang province that was agreed upon in 1997. The construction of the pipeline is to be conducted in three stages. The first section of pipeline from the Aktöbe region’s oil fields to the Atyrau was completed in 2003. The construction of the 987 kilometer long second section of pipeline from Atasu to Alashankou started in September 2004 and was completed in December 2005. It includes an oil meterage station at the Alataw Pass. In Alashankou this section is connected with the Alashankou-Dushanzi Crude Oil Pipeline, which runs to the Dushanzi District supplying mainly the Dushanzi refinery. The first oil through this pipeline reached the refinery in August 2006. The third section of the Kazakhstan-China oil pipeline will be Kenkiyak-Kumkol and it is expected to reach full capacity in 2011.

The pipeline is to supply China with Kazakh oil from its oil fields in the Aktyubinsk region as well as from the Kumkol fields of the newly acquired PetroKazakhstan project. Its projected annual capacity is initially 10 million tons, to be expanded to full capacity of 20 million tons. However, it is becoming clear that the pipeline will not be able to operate at capacity without additional oil from non-Chinese controlled sources. The two options are oil from the Kashagan field that is currently being developed and western Siberian oil by connection with Russia’s Omsk-Pavlodar-Shymkent-Türkmenabat pipeline.

Energy-rich Kazakhstan and energy-hungry China seem to be a match made in heaven. China tries to diversify its sources of supply as it becomes increasingly dependent on oil imports. These have rapidly increased from less than 30 percent in 2000 to predicted 50 percent in 2010. In recent years, China has been active through its state-owned oil companies all over the world, not just in Kazakhstan, trying to gain access to oil. However, Kazakhstan is one of the very few sources of oil (Russia being the other important one) that can offer supply by land through a pipeline linking the two countries. This is of strategic importance to China which is forced to import the rest of its oil by tankers. And at present time China’s navy is not at a state that it could assure protection to ships delivering overseas oil, should it ever come to a conflict between China and the United States. An often suggested scenario is that the United States could attempt to energy-starve China with a naval blocade in an event of an escalation of the Taiwan conflict. Therefore, while Kazakhstan’s oil supplies at present and likely in the future will not make up a large share of China’s imports, they are of geostrategical importance.

For Kazakhstan, the oil pipeline to China helps it to diversify its oil exports. Currently, the vast majority of its oil is exported through Russia which has shown that it is not afraid to use its energy resources to exert pressure on its partners overseas. In the future, it’s likely that the majority of Kazakhstan’s oil exports will continue going through Russia. A diversification of its transport options to China and Azerbaijan, however, is an important symbolic step in exerting itself from Russia’s tight grip.

While currently China’s role in Kazakhstan’s energy sector is relatively small compared to that of Russia or Western oil companies, it is safe to assume that it is going to keep on growing. The geographical vicinity of the two countries and the mutual benefit that both countries are set to derive from a common energy policy make this development likely and logical. The question that will be answered in the near future is how the growing influence of China will affect the current status quo in Kazakhstan.